Bringing Your PFI Status Back from the Dead

The difference between a credit union and a funeral home is that people are not dying to do business with a credit union.

But there are lessons to be learned from the funeral home industry that can help credit unions improve their primary financial institution status with members and increase profitability, according to David W. Furnace, a former community banker and president of Haberfeld Associates, a financial consulting firm based in Lincoln, Neb.

“The credit union industry is alive and well and thriving, but we think there are opportunities for credit unions to do substantially better,” Furnace said during his Aug. 26 webinar, The Mortician’s Guide to PFI Member Growth in 2015. “What we hope for is the death of conventional wisdom about how credit unions should conduct their business,” he added.

Furnace drew on his own experiences making funeral arrangements for his late mother last year in Austin, Texas, for the webinar’s content. Interactions with two different funeral homes proved unsatisfactory, causing Furnace to question the funeral industry’s business model and find applications to the financial services industry.

“We go through life experiences that cause us to think of our business in a different way, and that’s the purpose of what I hope will be a whimsical and not to macabre webinar,” Furnace said.

His initial observations of the funeral business included the realization that the services provided were a largely undifferentiated commodity that varied little from provider to provider. The funeral home itself is large, expensive facility that is generally empty and underutilized, customers make buying decisions based on emotion rather than logic, and the mortician only gets one chance to close the sale.

Furnace saw significant parallels between funeral homes and credit unions. In examining one funeral home’s business plan, in fact, he discovered its motto was “People Remembering People.”

The funeral home’s business plan estimated that it performed 29 funerals per year or less than one every two weeks. That raised the question of whether the home had the capacity to expand its business significantly, something credit unions also should ask themselves.

“Do you have excess capacity in your credit union?” Furnace asked. “Of course you do! In most credit unions I could fire a cannon in the lobby and not hit a live member.”

Furnace estimated that banks hold about 60% of total consumer assets and have suffered a 20% hit in revenues from increased compliance, technology and other factors. As a result, banks have embraced a strategy of raising prices and shedding marginal customers in order to keep profit levels high.

Most credit unions, on the other hand, operate at 20% to 30% of capacity and could as much as triple their business capacity without investing in additional fixed costs by expanding facilities.

Should credit unions follow the same customer-shedding strategy?

This is where the death of conventional wisdom comes in, the consultant said.

In most case, that wisdom dictates that credit union members cost roughly $300 each to serve each year. In an excess-capacity situation, however, it is more important to understand the marginal costs of serving one more member, he said.

Fixed costs by and large remain the same, Furnace explained, but marginal costs to give another member a checking account, provide a debit card and do the additional data processing to support the account are minimal. Marginal costs for additional members fall closer to the $30 to $40 per account range, which makes those accounts that the banks have shed suddenly more appealing.

“The right way to leverage the model is not to raise fees and become more exclusive in who we target,” Furnace said. “It is, instead, to say, ‘I can get a lot more members, serve a lot more people a lot better and perform better along the way.’”

Research by Haberfeld indicated the average member household holds 2.49 credit union accounts and purchases 5.2 products or services. Add to that fee income and cross selling opportunities, and the value of that account spikes much higher than the account’s servicing cost, assuming it operates within the institution’s existing service capacity, Furnace said.

Based on this analysis, the net present value to the credit union of a consumer relationship on average is $2,015, the consultant said. The net present value of a business relationship is $7,493.

“The key to growing this relationship is for the credit unions to become the member’s PFI,” Furnace said. “There is an emotional component and you want to engage that member with the credit union. A checking account is the beach head of that engagement.”

Success will hinge around gaining new members, which Furnace admits is extremely difficult unless consumers already are in the process of change. Roughly 10% to 15% of households switch financial institutions each year, a zero-sum game that revolves around institutions trading customers in a finite environment.

Since new accounts often are opened with new money that is not already domiciled in another institution, being available around consumer paydays can be critical to increasing the flow of funds into the credit union. In practice, people are often paid weekly, usually on Fridays, or twice monthly. Those are key time for credit unions to become visible entities in their marketing efforts, he said

Offering attractive financial products at a time when consumers are seeking a change can help credit unions increase their member base, which will lead to greater profitability, Furnace said. Member referrals can be the single most important component in attracting new members.

“Most consumers don’t think they should have to pay for you to help manage their money. They want things simple and free,” Furnace said. “Just remember that complexity kills opportunity.”